It's here: the Department of Education has published its Student Aid Index and Pell Grant Eligibility Guide for the 2025-26 school year. This is the FAFSA formula, aka how the sausage gets made. The Guide is available for download below, but first a little context and explanation.

About a week ago the Department of Education announced that this year's FAFSA will be available Dec. 1 on studentaid.gov. Fingers crossed that this year's rollout is not the fiasco that last year was. Here's the thing: you probably don't need to file it on Dec. 1. Financial aid is allocated by colleges, not by the FAFSA. That means that until colleges review your application, they won't do anything with your financial aid submission. The exception to the "don't file on Dec. 1" rule: If you are eligible for any form of aid that is allocated on a first-come, first-served basis, you should file the FAFSA as soon as it's available. This includes some state grants, colleges offering rolling admission with first-come, first-served financial aid, and some public colleges that prioritize earlier financial aid submissions. If you don't fall into any of those categories, don't waste your time trying to file the FAFSA on Dec. 1 because you'll just spend a bunch of time refreshing your browser while the site crashes from the millions of people trying to log on.

Before we get into the formula, here's the most important thing to know abut the FAFSA: Having a low Student Aid Index does not guarantee you need-based financial aid at the college of your choice. Filing the FAFSA does guarantee access to all federal student aid programs for which you're eligible including Pell Grants and unsubsidized student loans. It also allows colleges to evaluate all students' ability to pay on a consistent set of metrics; it does not obligate them to meet student financial need.

Much of the FAFSA formula is unchanged from last year, when the major revisions went into place. The formula still considers four elements in calculating your SAI:

• Parent income

• Parent assets

• Student income

• Student assets

There are in fact 3 FAFSA formulas: one for dependent students (Formula A), one for independent students without dependents (Formula B), and one for independent students with dependents (Formula C). Everything in this blog post refers to Formula A, dependent students.

Every year, nominal updates are made to the formula, largely adjustments to allowances due to inflation. This blog post will focus on changes since last year; to see details about what is and is not included in each of the above elements, please read this post.

Parent Income

Parent income is prior-prior year, meaning that you use your most recently filed tax return. When filing the FAFSA in 2024 (or early 2025 as the case may be), you'll use your 2023 tax return. Here's the key takeaway from this: there's nothing you can do now to impact your income on this year's FAFSA. (Prior-prior year may seem like it's just prior year; keep in mind that the FAFSA is for the school year starting in 2025, thus making 2023 the prior-prior year.)

The FAFSA uses tax return income only. When you file, you link your tax return data directly to the FAFSA; you do not have to enter individual lines manually. Please do yourself a huge favor and just recognize that direct data transfer is the best way to report income. You can do it manually; however, it's not just a gigantic pain in the neck, it also increases your likelihood of being subjected to FAFSA verification.

Even though you transfer everything from the IRS to your FAFSA, you still should have your tax return handy for reference. That's because there is one untaxed item that you get to subtract from your income: any IRA or 401k rollover that was included on your tax return. (Note: if you need to do a rollover during a FAFSA income year, make sure to do it trustee-to-trustee. That way it doesn't need to get reported on your tax return and you don't have to deal with subtracting it here.)

Parents also get several allowances against income:

• Their federal tax liability

• An allowance for payroll taxes (FICA)

• An Income Protection Allowance based on family size. The Income Protection Allowance is just under 150% of the federal poverty level. A family of 4 gets an IPA of $43,870 on this year's FAFSA.

• An Employment Expense Allowance, which is the lesser of 35% of the parents' combined income or $4,890

All of these are added and subtracted to come up with Available Income. Available Income is assessed at progressive rates-- like taxes-- ranging from 22% on Available Income of -$8,300 (yes, negative available income still gets assessed) to 47% on Available Income above $42,900.

Parent Assets

The FAFSA counts assets on the day that you file. Assets count at their net value. That means that if you have a margin or pledged asset loan on your investment account, you subtract that amount from the value. Likewise with a business or investment property, you would subtract all liabilities from the business' value including debt and current liabilities (payroll, rent, etc). Unfortunately consumer debt such as credit card debt and student loans is not subtracted.

With assets counting on the day you file, you'll want to figure out the best day to file. That would be after paying your mortgage or rent and credit card bill and any other large expenses, and before your next tranche of RSUs vests.

Assets only count at 5.64% of their value, meaning that every $1,000 of additional assets only adds $56 to your ability to pay. Strategizing about assets is really nibbling around the edges of the formula. However, it is the one area where you can make a difference. If your mortgage and credit card total $4,000, waiting until you've paid them to file would increase your aid eligibility by over $200. And you were going to pay them anyway. Similarly, making your 2024 Roth IRA contribution would reduce your ability to pay by almost $400. And since you don't report sibling 529s on your FAFSA, make sure to contribute to everyone's 529 before filing. Small changes can add up!

Student Income

Most students don't need to worry about their income affecting their FAFSA, since students get an Income Protection Allowance of $11,510 this year. And since the FAFSA only takes income from tax returns, students who do not file taxes do not report any income. Student income is likewise prior-prior year, so it's unlikely that your student's high-paying summer internship in college will impact their financial aid, since those types of internships typically aren't available until the summer after sophomore year.

One big change from last year: students can no longer have a negative contribution from income. Under last year's formula, students could have up to $1500 subtracted from their SAI simply by having less income than the student Income Protection Allowance. Sadly this year's formula closed that loophole.

Student Assets

Students' bank and investment accounts also count, and a student who worked over the summer might have a lot of assets with wages being as high as they are now. Student assets count at 20% of their value, so every $1,000 in your student's account increases your ability to pay by $200.

Students wanting to remove assets from their balance sheet have a few easy options:

• If the money is for college, put it into their 529. This changes it to a parent asset which is assessed more favorably, and also makes sure that the money will still be there when they go to college.

• Open a Roth IRA. Teens can contribute the lesser of total earnings or $7,000 to a Roth IRA this year.

• Make any purchases they intended to make anyway prior to filing. This might be activity or yearbook fees at school, a new laptop, new clothes, whatever.

Got that? Now get this: the 2025-26 Student Aid Index and Pell Grant Eligibility Guide.

Hey! Need some help with all this? Grab a copy of my book, How to Pay for College: A complete financial plan for funding your child’s education.